The Bank of England today announced the first interest rate rise in a decade, with the base rate up a quarter of a percentage point, from 0.25% to 0.5%.
The move had been widely expected and comes after last year’s cut from 0.5% following the Brexit referendum.
There was strong support for the move within the Bank, with the nine-person Monetary Policy Committee supporting it by a majority of seven to two. As the move had been heavily trailed, market reaction was relatively neutral with sterling staying steady.
“The symbolism of this hike is more significant than its economic impact,” says Lucy O’Carroll, chief economist at Aberdeen Standard Investments.
She added that UK interest rates are still “exceptionally low” by historic standards, though the risk is that this could presage the start of a “cycle of rate hikes”, which could knock consumer confidence at a particularly vulnerable time for the economy.
Inflation has risen sharply, she said, but this is down to “temporary factors”, adding “the fact remains that wages are not increasing much and nor are underlying prices, so further substantial rate rises would not be warranted at this stage”.
Chase de Vere certified financial planner Patrick Connolly, was more relaxed, saying that while “in theory” rising interest rates are “bad news” for stock markets, the rise had been “heavily signposted and priced in by markets”.
He added that any further rises are likely to be slow and gradual, “so there shouldn’t be any nasty surprises”.
He pointed out, however, that an environment where individuals and businesses have less spare money because of the rise will be bad for some shares, “such as technology and consumer discretionary stocks”, which include non-essential purchases like leisure and entertainment.
The rise would be likely, he said, to affect bond proxies, which provide a consistent level of income and have been bought by many investors as an alternative to expensive fixed interest assets.
This would include shares such as “utilities and consumer staples like companies providing food, beverages and household items”.